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Tuesday, February 17, 2009

Santander's Banif Fund Suspends Payments

by Edward Hugh: Barcelona

"I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable."Wolfgang Munchau, Financial Times, 15 February 2009.

German Finance Minister Peer Steinbrueck said on Monday euro zone countries would have to pull together if one of them faced a "serious situation," adding that Ireland was in a "difficult situation."

Investors are increasingly concerned that Ireland may default on its national debt as the government pledges more money to help troubled banks, the Sunday Times said. Credit-default swaps on Ireland’s government bonds reached record levels last week as debt investors rate the nation as Europe’s most-troubled economy, the paper said. Ireland has pledged financial help for lenders that would be more than double its annual economic output and the loans held by its banks are more than 11 times the size of its economy, the report said. Credit-default swaps on the five-year sovereign debt of Ireland, which is rated AAA by Fitch Ratings, jumped 49 basis points on Feb. 13 to a record 377, according to CMA Datavision prices. That’s 18 basis points more than the cost to protect the debt of Costa Rica, which Fitch rates BB, or 11 grades lower than AAA, from default.Bloomberg, 16 February 2009

Well push is, I think, now getting much much nearer to shove time, and we now wait restlessly to know what EU leaders are going to offer in the way of a second round of bank bailouts at the end of this month. As I argue in this post, and as Munchau also suggests, more than sweet words will be needed to honour the commitment made on October 12 2008 in Paris that no "systemic" EU bank would be allowed to fail, as a minimum we need a comprehensive mechanism financed by the issuing of EU bonds.

The most recent and most obvious example of the push coming to shove situation is the announcement by Spain's Banco Santander, yesterday (Monday), that its Banif property fund, the largest of its type in Spain, could not meet the avalanche of redemption requests it had been receiving, and consequently had asked the stock market regulator for permission to suspend payments for up to 2 years.

According to the bank's own statement clients (of whom there are a total of around 50,000) holding 80 percent of the investments, or 2.62 billion euros, had asked to redeem their holdings while what is the eurzone's biggest bank had had to admit that the Banif Inmobiliario Fund FII lacked the cash to facilitate this, and that they, Banco Santander were not going to inject the liquidity necessary to enable the fund so to do.

This decision stands in sharp contrast with the earlier action of Spain's second-biggest bank BBVA who, when faced with a similarly massive demand from clients to redeem their investments at the end of last year, opted to buy 95.6 percent of their 1.57 billion euro fund, which is the second biggest in the Spanish market.

Banif has 67 percent of its assets invested in housing, 18 percent in offices, and 14 percent in commercial property, according to the fund's fourth quarter report. These properties are distribuited around Spain, with heavy concentrations in Madrid, the Balearic Islands and the north-west. Offices and commercial premises are mainly centred in Madrid and Barcelona. The fund's assets lost around 15 per cent of their value between the third and fourth quarters as values were adjusted to reflect price declines. Property sales are in constant decline in Spain - according to figures released yesterday, total sales December home sales were 26 per cent down over December 2007. House prices in Spain fell January on January by around 10% and may fall by a further 20 percent this year according to a report last week fromTasaciones Inmobiliarias SA (TINSA), the country’s biggest property valuer.

Banif, which is described in its prospectus as “low risk,” produced a yield of 1.37 percent last year, down from 5.87 percent in 2007, according to the fourth-quarter report, while assets under management fell 4.2 percent in January, according to data published by Inverco, the Spanish asset management association.

Analysts are evidently alarmed by this development and are warning of the immediate danger that this news could spark a a massive demand for redemption from investors in other Spanish real estate funds. There are currently nine such funds in Spain, with assets totalling around 7.25 billion euros under their management.

"I've never seen a case like it," said one fund manager at Madrid brokerage Renta 4, who asked not to be named. "It could trigger a snow ball effect; that's one of the consequences when you start to hear that the biggest (fund) is doing badly".

Santander's property division propose to use 10 percent of the fund's assets - valued at 3.41 billion euros at end-December - to pay investors partial redemptions, saying that if the necessary capital could not be raised through asset sales, it would inject cash itself. The statement also said that should the fund not be in a position to fulfil repayment requests within two years it would wind itself up. Clearly this news was not exactly enthusiastically greeted by the Spanish Bolsa, and Santander stock closed 4 percent lower at 5.49 euros after a sharper sell off in the last 30 minutes of trade. This compares with a 3 percent fall in the DJ European banking index.

“What’s happened is another symptom of deep structural problems facing the Spanish real estate industry, which will take years to resolve,” said Juan Jose Figares, chief analyst at Link Securities in Madrid.

Bad Debts Rising At Santander

Spanish banks, including savings banks and co-operatives, saw bad loans rise by 5.2 percent in December to 59.16 billion euros ($75.49 billion) from 56.12 billion euros in November, Bank of Spain data showed yesterday. The non-performing loans (NPL) ratio for all institutions was 3.3 percent at end-December, compared with 3.13 percent in November, with rates among savings banks the highest, at 3.79 percent, up from 3.63 percent the previous month. The bad debt ratio for commercial banks rose to 2.81 percent from 2.61 percent.

In the case of Santander such loans more than doubled to 14.2 billion euros in 2008 as a recessions in Spain and in the U.K. lead to rising defaults by borrowers. Loan arrears as a percentage of total lending totaled 2.04 percent at the end of December, up from 0.95 percent a year earlier and 1.63 percent in September. The bank added 3.6 billion euros in bad loans in the fourth quarter. The bank stated during the presentation of its full year results that NPLs in the Spanish banking system could rise up to 8 percent in 2009 as the country heads in to its worst recession in 50 years.

“The U.K. is a terrible place for a bank to be and Spain is also looking more and more dreadful,” said Lecubarri, who manages about $250 million, in a telephone interview ahead of results. “What’s key for investors is judging how this will keep affecting asset quality.”

Santander has said it will pay 1.38 billion euros to clients hit by losses from investments with Madoff, making it the first bank to offer a settlement in the affair. The bank’s Optimal Investment Services hedge fund unit, based in Geneva, had 2.3 billion euros with Madoff.

Metrovacesa To Be Handed Over To Creditors

Metrovacesa, which is Spain's biggest property firm, will be handed over to its creditors on February 20, slightly later than its main shareholder originally planned, in return for the banks cancelling debt. The Sanahuja family, which has an 81 percent stake in Metrovacesa, have said in a stock market announcement said it will hand over 54.75 percent of the office, mall and housing developer to six creditor banks next Tuesday.

"The arrival of some documentation has been delayed and the entry of the banks is delayed until next Tuesday. The company will also publish (full year) results) on Tuesday," a spokesman for the family said.

The Sanahuja family accumulated between 4 and 5 billion euros in debt through their acquisitions, but got into difficulties when the market turned and banks restricted further lending. As a result of the "handover" BBVA, Santander, Sabadell, Banco Popular, Banesto and Caja Madrid will each take 9 percent of the company. The Spanish banks are thus constantly expanding their property portfolio as the non performing loans pile up.

And The Credit Crunch Continues

German Chancellor Angela Merkel and French President Nicolas Sarkozy called on European Union states on Monday to focus efforts on ensuring credit lines were restored to the battered European economy. "The restoration of the supply of credit must be our top priority," they wrote in a letter to the Czech EU Presidency, a copy of which was obtained by Reuters. "We must renew our commitment to a return to sustainable public finances," they added in the letter, which also called for a special summit on the economic crisis later in February.

According to the latest report from Markit economics Spanish manufacturers are being hit the hardest by credit squeeze as the financial crisis deepens and factories swoon into closure. Markit found that more than one in five manufacturing companies in Spain feel the deterioration in credit conditions is hurting their business, while 46 percent reported that credit availability had worsened from three months earlier.

In an attempt to address the problem and provide credit direct to the customer, the Spanish government have now approved a 4.17 billion-euro plan to aid the car industry. The plan involves an injection of 800 million euros this year to improve productivity and 1.2 billion euros which will be made available for consumers to finance new-car purchases. The plan also includes loans for companies and permits manufacturers to delay paying social security taxes. The At the start of the recession the Spanish car industry represented around 6 percent of Spain’s economy and employed more than 350,000 people. Spanish January car sales were down 42 percent from a year earlier, according to the trade group ANFAC.

Action At The EU Level Urgently Needed

I will close this post as I opened it, with a quote from Wolfgang Munchau. Wolfgang suggests that the action which is needed is not going to happen. It could well be he is right, although I personally at this point have not abandoned all hope. But we should be in no doubt, the price of inaction at this point will be high, as high as that which Wolfgang suggests. The EU banking system is in danger, and it is danger not just in Southern European "PIG-like" economies. It is in danger in Germany, it is in danger in the UK. We need a collective response, and we need it now!

The right course would be to solve the underlying problem – to shift at least some of the stimulus spending to EU or eurozone level and, ideally, drop those toxic national schemes altogether and to adopt a joint strategy for the financial sector, at least for the 45 cross-border European banks. But this is not going to happen. It did not happen in October, and it is not going to happen now. As a result of the extraordinary narrow-mindedness of Europe’s political leadership, expect serious damage to the single market in general and the single market for financial services in particular. As for the eurozone, I always argued in the past that a break-up is in effect impossible. I am no longer so sure.

Update

Reuters have a very useful piece of background which gives us a bit of insight into current thinking. Comparisons are being made with what happened after Spain's last recesssion, since banks bougtht up large chunks of the of the property industry during the 1993-95 recession before making up to seven times their original investment by selling them on in the 1997-2007 property bubble. However there are serious question marks over whether a model like this will work this time round, since property prices may simply take a substantial fall, and then prices may well stay low, as happened in Japan after 1992. Certainly current conditions look nothing like Spain in 1994, and the banks' current haste to buy property, rather than allow failing businesses to go bust, is artificially lowering NPL rates now, only to delay future loan losses, losses that will hit sooner or later (my guess is 2011) as it finally sinks in that this is not a normal recession and that there will not be a normal recovery. Santander, for example, bought 2.6 billion euros of property last year at 10 percent under the (official) market rate. The bank argues that had it not swapped that debt for property, loans on 13 percent of those assets would have defaulted.

Spanish banks are returning to property ownership to avoid loading more bad loans on to their balance sheets but the strategy is risky and unlikely to be as profitable as their real estate buying spree 15 years ago. Spain's eight biggest banks last year formed or resurrected property wings that have bought up 7.8 billion euros ($9.9 billion) worth of property from struggling home-owners and developers.

The main threat to Spanish banks has come not from the toxic U.S. mortgage debt that has poisoned U.S. and British institutions, but a rapidly deepening recession propelling their bad loan rate to an expected 7 percent this year and 9 percent in 2010 from 2.8 percent last October, according to the Bank of Spain. Mindful of the need to keep bad loans to a minimum, bankers are doing everything to stop another major developer filing for administration as Spain's biggest house builder Martinsa Fadesa

Not only will creditors likely take years to recover debts from Martinsa but the default also ramped up non-performing loan (NPL) rates as they provisioned 25 percent of the loan, or 250 million euros in the case of No.2 savings bank Caja Madrid. "By buying real estate assets the banks stop loans becoming bad loans. In so doing, the client's debt with the bank is canceled and they avoid not only increasing bad loans, but they also avoid having to make more provisions," said Nuria Alvarez, an analyst at Madrid brokerage Renta 4.

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Claus and Edward's "Baker's Dozen"

Claus Vistesen and Edward Hugh are proud and happy to announce that they are now working as "featured analysts" with a new Boston-based start-up - Emerginvest.

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The oldest known source and most probable origin for the expression "baker's dozen" dates to the 13th century in one of the earliest English statutes, instituted during the reign of Henry III (r. 1216-1272), called the Assize of Bread and Ale. Bakers who were found to have shortchanged customers could be liable to severe punishment. To guard against the punishment of losing a hand to an axe, a baker would give 13 for the price of 12, to be certain of not being known as a cheat. Specifically, the practice of baking 13 items for an intended dozen was to prevent "short measure", on the basis that one of the 13 could be lost, eaten, burnt or ruined in some way, leaving the baker with the original dozen.